Discounted oil prices costing Canadian economy billions

Canadian oil producers have filled their storage facilities to overflowing while waiting for an answer to their dilemma. The problem is the price discounts on Canada's heavy oil. Pipeline and rail constraints have only made the problem worse.

Suncor Edmonton refinery

Suncor / Newsroom

The difference between the prices of heavy Canadian oil and U.S. light crude has hit $50 a barrel in recent weeks, and there is no relief in sight for Canada's oil producers. While the discounts have mainly been affecting heavy crude, they have now spread to light oil and upgraded synthetic oil sands crude.

The economic costs are often the last thing anyone wants to talk about, but the Canadian Association of Petroleum Producers officially estimates the impact as at least $13 billion in the first 10 months of 2018.

The economic costs in October were estimated to be $50 million per day as discounts for Western Canadian Select bitumen-blend crude oil versus New York-traded West Texas Intermediate peaked at more than $52 US per barrel.

"The differential has blown out to such an extreme level for two reasons, the lack of access to markets and the fact we really have only one customer (the United States)," said Tim McMillan, CEO of CAPP, reports CBC Canada.

A shutdown at one of the refineries
servicing YVR would have a
significant impact on the airport
and the public it serves.

Vancouver Airport Fuel Facilities Corp.

Refineries south of the border

The oil glut in Canada is also being seen in the United States - where oil producers ramped up production in the nation’s third-largest oilpatch, the Bakken, boosting crude output to a record 1.3 million barrels per day (bpd) in October, overwhelming pipelines and rail cars.

The increased production on both sides of the border has created what appears to be a serious problem that could get even worse as winter descends. The Bakken's pipeline capacity is just 1.25 million bpd, and this has already forced many North Dakota oil producers to rely on less efficient rail - which could lead to problems this winter.

North Dakota oil producers are saying Canada's grappling with bottlenecks is pushing more oil into the United States, worsening the constraints. Bakken crude traded at a record $20-per-barrel discount to U.S. crude futures WTC-BAK last week, and last traded at a $13.50-per-barrel discount on Friday.

“That basin is flush with barrels and there’s no way out,” Rick Hessling, senior vice president at U.S. refiner Marathon Petroleum Corp, said in an earnings call last week, adding that winter will make rail loadings more difficult. “We kind of see that as a perfect storm.”

Digital Journal reported last week that because of the bottlenecks in moving crude oil out of Canada, that several oil producers were cutting production, including Cenovus and Canadian Natural Resources. "You're going to have to shut in production at some point in the coming months to balance supply and demand," Jon Morrison with CIBC World Markets, told a recent conference in Calgary.

Bakken oil unit train heading east out of Williston, North Dakota.

mrndmdw

U.S. refineries in "the cat-bird's seat"

Two of Minnesota's Twin Cities oil refineries have found the discounted Canadian oil prices good for their business. Canadian oil accounts for most of the gasoline produced in Minnesota, as it does with many refineries in the Midwest and Great Lakes region.

“These two refineries in the Minneapolis area are in a terrific position,” said Patrick DeHaan, head of petroleum analysis at GasBuddy.com, a fuel price tracking firm. “It’s ‘Let the good times roll.’ ” DeHaan added, “The [Canadian oil] discount you are seeing is primarily going to their bottom lines."

However, DeHaan says retailers and customers are not receiving any benefit from the discounted Canadian oil prices because the saving to the refineries is not being passed down the line.

Still, “refineries are in the catbird’s seat,” said Sandy Fielden, a stock analyst at Morningstar. “They have a license to print money because they are buying crude cheap.”

ExxonMobil, Phillips 66 and BP all posted strong quarterly earning two weeks ago, buoyed up by strong refining profits. This was due to discounted Canadian oil as well as a lower price on oil produced in West Texas.

“On discounts, we’re bullish,” Rick Hessling, a senior vice president, told stock analysts on the call. “We see all-time high production in Canada.” He noted that Ohio-based Marathon can take an even greater advantage of the Canadian discount now that it owns the St. Paul Park refinery.